Does The Entertainment Industry Depend On A Strong Economy?

By Kristina Zucchi, CFA | August 09, 2010 AAA

The entertainment industry depends on strong discretionary spending to thrive. This past quarter, several of the industry leaders reported poor results, which were partly attributed to the weak economic environment but primarily ascribed to company or industry-specific issues like weak superstar appeal. Although the companies seemed to "blame" industry talent for some of the shortfalls, investors wonder whether the talent level would have hurt sales as much if the economic climate was stronger. In other words, in a stronger economy, would customers be as picky about spending money on entertainment as they seemed to be in the second quarter?

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Companies Experiencing Losses
Live Nation (NYSE: LYV), a producer of music concerts worldwide, reported a Q2 loss of 20 cents per share, a significant disparity from the 2 cents per share that analysts expected. The loss was attributed to specific industry issues as well as general concert attendance, which was down 6% compared to the year-ago quarter. The company commented that the weak sales were due to a poor concert talent pool, as major acts decided to postpone concerts in lieu of touring in 2011.

World Wrestling Entertainment (NYSE: WWE) also had a difficult Q2. The company reported a 69% drop in net income, and even after adjusting for the timing of the Wrestlemania event, its earnings dropped from 14 cents to 8 cents a share. The difficult environment was attributed to company-specific issues but also to "softness in the economy".

EBITDA Up For Cedar Fair
Cedar Fair
(NYSE: FUN), an operator of amusement parks in North America, reported an adjusted Q2 gain of 9 cents per partnership unit, down compared to a year ago, in which the company reported a gain of 13 cents per partnership unit. Taking into account the calendar differences and merger-related expenses from the prior year, Cedar Fair reported strong adjusted EBITDA, up close to 20%. The company attributes the strong EBITDA to increased attendance and revenues. (To learn more, see A Clear Look At EBITDA.) Cedar Fair reports that season passes and group sales drove revenues, a strategy that the company has been emphasizing.

Gaming Industry Up In Macau
Despite the weakness in some factions of the U.S. entertainment industry, globally there seems to be more definitive areas of strength - most notably the gaming industry in Macau, which saw a 70% increase in gambling revenue in July. Melco Crown Entertainment (Nasdaq: MPEL) owns and operates casinos and other entertainment facilities in Macau. The company posted a 166% gain in revenue compared to a year ago, and EBITDA swung from a loss of $23.8 million to a gain of $73.4 million over a 400% improvement. While company-specific operating changes impacted 2009 results, the gain Melco Crown saw from its new casino indicates the "if you build it, they will come" mentality rings true for this part of the world! (To learn more about vice investing, see The Evolution Of Sinful Investing.)

Bottom Line
Entertainment is big business - but a business that relies heavily on the ability of consumers to have discretionary funds available for spending. So while several companies blamed talent weakness for the negative trends, the economic environment impact was palpable. Still, others seemed to be indifferent to the current climate. Knowing which companies are immune will give investors a win.

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